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socrateaser
socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 34079
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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I am from California.---After getting Chapt 7 debts discahrged

Customer Question

I am from California.---After getting Chapt 7 debts discahrged this year, we decided not to surrender the rental property we jointly owe. Now we are having economic problems and decided to let bank take the property and sell it.

I realize that the mortgage debt (shortage after the bank sells it) is not taxable income, but there is the issue of reporting the home's capital loss of $50,000.00 and its accumulated depreciation of $48,000.00). If they are capital items, can the L.T capital loss wash out the L.T. capital gain( accumulated depreciation recapture?)
Submitted: 3 years ago.
Category: Bankruptcy Law
Expert:  jcehlers replied 3 years ago.

Hello,

 

The gain or loss from a foreclosure or repossession will be the amount of outstanding debt immediately before the transfer, less the adjusted basis of the property. The adjusted basis is the total cost of the property less accumulated depreciation. If you have a gain, some of the gain may be taxed as "unrecaptured 1250 gain" at 25%.

 

I cannot tell from the information you provided whether you will have gain or loss.

 

Thank you for your question. Let me know if you need additional help.

 

Jacy

Customer: replied 3 years ago.

You wanted to know whether I had a loss a loss or gain) I believe with this info you can help me better:

 

 

Current Market value $200,000.00

Purchase price it cost me $250,000.00

Capital loss (50,000.00)

 

Depreciation taken on the rental house to date: $ 48,000.00. This I believe is a long term gain to be recaptured, and it is taxable. But when you report this gain, you also must report the loss in value. My question is : Can you offset the capital gain of $48,000 from the LT loss of $50,000.00 in the tax return for 2010?

 

ABOUT DEBT FORGIVENESS in CH.7. Our debt on the house was discharged in Chapt 7. This would be loan balance of $328,000.00 less $200,000.00, Market value equals $128,000.00 of debt. This I know because my bankruptcy lawyer told me the debt is discharged forever. And I received my Chapt 7 discahrge to prove it.

 

It is the capital losses and gains aspects I am concerned when the house to be gets foreclosed on this month. Yes bankruptcy book says that if you can't pay you will be foreclosed on, regardless that the debt was previously discharged. I will pay you only if you answer the questions about the gains and loss qustions.

 

Expert:  jcehlers replied 3 years ago.

Hi,

 

The gain on the foreclosure is the loan balance less your adjusted basis. This is $328,000 less your cost of 250,000 less the depreciation. This is a gain of $126,000.

 

As I am not experienced in bankruptcy as it relates to taxes, I will opt-out of this question and let another expert give you advice.

 

Best wishes,

 

Jacy

Customer: replied 3 years ago.
Relist: The expert who tried to and did not answer my tax question says she's opting out, as shes not qualified in this area as it relates to dischage of bankruptcy and taxes.

Please get me another expert who can answer my qestions..
The expert who tried to and did not answer my tax question says she's opting out, as shes not qualified in this area as it relates to dischage of bankruptcy and taxes.

Please get me another expert who can answer my qestions.
Expert:  socrateaser replied 3 years ago.
Hello,

I am a member of the State Bar of California with knowledge of bankruptcy laws.

If you still have questions about your circumstances, please restate the question for me, so I know what you want answerd.

Thanks!
Customer: replied 3 years ago.
Question restated:

Facts:

My rental property is included in Chap 7
Loan balance $328,000.00
Adjusted basis: $200,000.00 (without accumulated depreciation)
Accumulated depreciation: $50,000.00 (not included in adjusted basis above)
Market value: $210,000.00

The debt was discharged in Ch 7.(As you know bankruptcy is not specific on the amounts dischaged. )


Please answer these questions
1) What is the amount discharged in Ch 7 and how did you arrive at it? I assume this is not taxable, since it was discharged, correct?

2) What about the past depreciation of $50,000.00. This was not included in adjusted basis. Would this be discharged or would it be taxable as a capital gain?



Expert:  socrateaser replied 3 years ago.
Facts:
My rental property is included in Chap 7
Loan balance $328,000.00
Adjusted basis: $200,000.00 (without accumulated depreciation)
Accumulated depreciation: $50,000.00 (not included in adjusted basis above)
Market value: $210,000.00

The debt was discharged in Ch 7.(As you know bankruptcy is not specific on the amounts dischaged. )

Please answer these questions
1) What is the amount discharged in Ch 7 and how did you arrive at it? I assume this is not taxable, since it was discharged, correct?

A: $328,000 - $210,000 = $118,000: amount discharged and not taxable.

2) What about the past depreciation of $50,000.00. This was not included in adjusted basis. Would this be discharged or would it be taxable as a capital gain?

A: $328,000 - $200,000 - $50,000 = $178,000 capital gain from the sale - $118,000 reduction of tax attributes in bankruptcy = $60,000 capital gain subject to income tax.

Other debts discharged in bankruptcy may reduce this gain further.

Hope this helps and happy holidays.

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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 34079
Experience: Attorney and Real Estate Broker -- Retired (mostly)
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